PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
DRAFT — FOR DISCUSSION PURPOSES ONLY — SUBJECT TO REVISION
BILATERAL ADVANCE PRICING AGREEMENT
Between
The Competent Authority of the United States of America (Internal Revenue Service)
and
The Competent Authority of the Federal Republic of Germany (Bundeszentralamt für Steuern)
Concerning
Halcyon Semiconductor Inc. and Halcyon Semiconductor AG
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
C&H Matter Number: 1032-00006
Draft — July 2025
DRAFT — FOR DISCUSSION PURPOSES ONLY — SUBJECT TO REVISION
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
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BILATERAL ADVANCE PRICING AGREEMENT
This Bilateral Advance Pricing Agreement (this "Agreement") is entered into by and between the Competent Authority of the United States of America, acting through the Internal Revenue Service ("IRS"), and the Competent Authority of the Federal Republic of Germany, acting through the Bundeszentralamt für Steuern ("BZSt"), with respect to the transfer pricing methodologies applicable to certain intercompany transactions between Halcyon Semiconductor Inc. ("HSI") and Halcyon Semiconductor AG ("HSAG").
RECITALS
A. Treaty Authority. This Agreement is entered into pursuant to Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and to Certain Other Taxes, signed at Berlin on June 29, 2006, together with its Protocol (the "Treaty"). The Competent Authority of the United States acts through the IRS Advance Pricing and Mutual Agreement Program ("APMA"), which operates within the Large Business & International Division of the IRS. The Competent Authority of the Federal Republic of Germany acts through the Bundeszentralamt für Steuern ("BZSt"), located in Bonn, Germany, which is vested with authority to negotiate and conclude bilateral advance pricing agreements on behalf of the Federal Republic of Germany.
B. Applicable Law. This Agreement has been developed with reference to the following domestic and international authorities:
(i) United States: Section 482 of the Internal Revenue Code of 1986, as amended ("IRC § 482"); Treasury Regulations §§ 1.482-1 through 1.482-9, inclusive, and § 1.6662-6; and Revenue Procedure 2015-41, 2015-35 I.R.B. 263 (as supplemented or superseded), which sets forth the procedures governing the IRS Advance Pricing Agreement program;
(ii) Federal Republic of Germany: Section 1 of the Außensteuergesetz ("AStG"), governing the adjustment of income from transactions between related parties; Sections 90(3), 162(3), and 162(4) of the Abgabenordnung ("AO"), governing transfer pricing documentation and estimation requirements; and the Gewinnabgrenzungsaufzeichnungsverordnung ("GAufzV"), governing the content and form of transfer pricing documentation;
(iii) International: The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) (the "OECD Transfer Pricing Guidelines"), including Chapter I (The Arm's Length Principle), Chapter II (Transfer Pricing Methods), Chapter VI (Special Considerations for Intangibles), Chapter VIII (Cost Contribution Arrangements), and Chapter IV (Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes); and Article 9 (Associated Enterprises) of the Treaty, which incorporates the arm's-length principle for the adjustment of profits between associated enterprises.
C. Applicants. Halcyon Semiconductor Inc. ("HSI"), a corporation organized and existing under the laws of the State of Delaware, United States Employer Identification Number 84-2917630, with its principal office at 8700 Parmer Lane, Building 4, Austin, Texas 78729, filed an application for an advance pricing agreement with the IRS Advance Pricing and Mutual Agreement Program on or about July 7, 2025, accompanied by a user fee in the amount of $113,500 as required under Revenue Procedure 2015-41, Section 4.12. Halcyon Semiconductor AG ("HSAG"), an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, Steuernummer 203/118/04527, Umsatzsteuer-Identifikationsnummer DE 814 723 956, with its registered office at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany, filed a corresponding application for an advance pricing agreement with the Bundeszentralamt für Steuern on or about August 15, 2025. HSI is a wholly owned subsidiary of HSAG.
D. Purpose. The purpose of this Agreement is to determine the transfer pricing methodologies ("TPMs") applicable to the Covered Transactions (as defined herein) between HSAG and HSI in order to ensure that such transactions comply with the arm's-length standard as set forth in Article 9 of the Treaty, IRC § 482, and § 1 AStG, and to provide certainty to the applicants with respect to their intercompany pricing and to eliminate the potential for double taxation for the APA Term and, if the Competent Authorities so agree, the Rollback Period. The Competent Authorities recognize that advance pricing agreements serve the shared objective of promoting cooperative tax administration, reducing compliance costs, and achieving a predictable and stable allocation of taxable income between the Contracting States.
E. Representation. HSI is represented in this matter by Calderwood & Harkness LLP, 599 Lexington Avenue, 38th Floor, New York, New York 10022, through its attorneys Leonard Cross (Partner), Sylvia Hartwell (Partner), and Leila Nazari (Senior Associate), who are authorized to represent HSI before the IRS pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative) duly executed by HSI. HSAG is represented before the BZSt by Kettner Pflüger Rechtsanwälte, Bockenheimer Landstraße 72, 60323 Frankfurt am Main, Germany, through its attorneys Dr. Tobias Kettner (Partner) and Friederike Lang (Senior Associate), duly authorized under applicable German law.
NOW, THEREFORE, the Competent Authorities of the United States of America and the Federal Republic of Germany, having engaged in mutual agreement consultations under Article 25 of the Treaty, hereby agree as follows:
ARTICLE I — DEFINITIONS
Section 1.01 — Defined Terms
As used in this Agreement, the following terms shall have the meanings ascribed to them below. Terms defined elsewhere in this Agreement shall have the meanings assigned to them in the respective provisions in which they are defined.
"Agreement" means this Bilateral Advance Pricing Agreement, including all appendices and schedules attached hereto, as the same may be amended, revised, or supplemented from time to time in accordance with the terms hereof.
"Annual Compliance Report" means the annual report required to be filed by HSI with the IRS APMA program, and by HSAG with BZSt, for each APA Year in accordance with the requirements set forth in Article IX of this Agreement, demonstrating compliance with the terms and conditions hereof.
"APA Term" or "Prospective Term" means the five consecutive prospective tax years beginning on January 1, 2025 and ending on December 31, 2029, as further described in Section 8.01.
"APA Year" means each fiscal year (beginning January 1 and ending December 31) during the APA Term. For the avoidance of doubt, APA Year 1 refers to the calendar year ending December 31, 2025; APA Year 2 refers to the calendar year ending December 31, 2026; APA Year 3 refers to the calendar year ending December 31, 2027; APA Year 4 refers to the calendar year ending December 31, 2028; and APA Year 5 refers to the calendar year ending December 31, 2029.
"Arm's-Length Range" means, with respect to each Covered Transaction, the interquartile range of results derived from the applicable benchmarking analysis, as defined in Section 4.02 (for Covered Transaction 1), Section 5.02 (for Covered Transaction 2), and Section 6.02 (for Covered Transaction 3).
"BZSt" means the Bundeszentralamt für Steuern, the German Federal Central Tax Office, which serves as the Competent Authority of the Federal Republic of Germany for purposes of this Agreement and the Treaty.
"Comparability Adjustments" means those adjustments applied to the financial data of comparable companies or transactions in order to improve comparability with the Covered Transactions, as set forth in the Economic Analysis, including but not limited to working capital adjustments, inventory adjustments, and other adjustments to account for material differences in functions performed, risks assumed, and assets employed.
"Comparable Profits Method" or "CPM" means the transfer pricing method described in Treasury Regulations § 1.482-5, under which the arm's-length result is determined by reference to the profitability of uncontrolled taxpayers performing comparable functions, assuming comparable risks, and employing comparable assets.
"Comparable Uncontrolled Transaction Method" or "CUT" means the transfer pricing method described in Treasury Regulations § 1.482-4(c), under which the arm's-length royalty is determined by reference to the royalty rates charged in comparable uncontrolled transactions involving the license of comparable intangible property under comparable circumstances.
"Competent Authorities" means, collectively, the IRS acting as the Competent Authority of the United States and the BZSt acting as the Competent Authority of the Federal Republic of Germany, in each case acting under Article 25 of the Treaty. Reference to a "Competent Authority" in the singular means either one of them, as the context requires.
"Controlled Transactions" means all transactions between HSI and HSAG, including the Covered Transactions and any other intercompany transactions not specifically addressed in this Agreement.
"Cost Sharing Arrangement" or "CSA" means the Qualified Cost Sharing Arrangement between HSAG and HSI effective as of July 15, 2018, as the same may be amended from time to time, pursuant to which the parties share the costs and risks of developing next-generation semiconductor process technologies in exchange for the right to exploit the resulting intangible property in their respective territories.
"Covered Transactions" means the three categories of intercompany transactions described in Sections 3.01, 3.02, and 3.03 of Article III.
"Critical Assumptions" means the material assumptions set forth in Article VII upon which this Agreement is premised and upon which the Competent Authorities have relied in agreeing to the TPMs and arm's-length ranges herein.
"Economic Analysis" means the benchmarking studies, economic analyses, and supporting documentation prepared by Meridian Economics GmbH (Dr. Annika Breitner and Maximilian Voss) and submitted as part of the APA applications filed by HSI and HSAG, as supplemented or updated during the Competent Authority deliberations.
"HSAG" means Halcyon Semiconductor AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, as further described in Section 2.02.
"HSI" means Halcyon Semiconductor Inc., a corporation organized and existing under the laws of the State of Delaware, as further described in Section 2.01.
"Income Method" means the method for valuing platform contribution transactions described in Treasury Regulations § 1.482-7(g)(4), under which the value of a platform contribution is determined based on the anticipated future income stream attributable to the contributed intangible property, discounted to present value.
"Interquartile Range" or "IQR" means the range of results from the 25th percentile to the 75th percentile of the applicable benchmark set, calculated in accordance with standard statistical methodologies and the Economic Analysis.
"IP-Attributable Revenues" means the portion of HSI's net third-party US revenues that is attributable to HSAG's licensed intangible property, calculated in accordance with the revenue attribution methodology set forth in the IP License Agreement and as detailed in Appendix B hereto.
"IP License Agreement" means the intellectual Property License Agreement between HSAG (as licensor) and HSI (as licensee), effective as of January 1, 2019, as the same may be amended from time to time, pursuant to which HSAG grants HSI the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangible property in HSI's US distribution and design-support activities.
"IRS" means the Internal Revenue Service of the United States Department of the Treasury, which serves as the Competent Authority of the United States for purposes of this Agreement and the Treaty.
"Master Intercompany Supply Agreement" or "MISA" means the Master Intercompany Supply Agreement between HSAG (as seller) and HSI (as buyer), effective as of January 1, 2019, as amended on July 1, 2022, and as further amended from time to time, pursuant to which HSAG manufactures and sells semiconductor wafers and singulated die to HSI for resale to unrelated customers in the United States and other North American markets.
"Median" means the 50th percentile point of the applicable benchmark set, representing the central tendency of the range of observed results.
"Operating Margin" means, with respect to any entity and any period, the ratio of operating income to net revenue for such entity and period, expressed as a percentage. For HSI, operating income means net third-party US revenue less cost of goods sold and less operating expenses (excluding interest income, interest expense, and extraordinary or non-recurring items), all as determined in accordance with United States generally accepted accounting principles ("US GAAP") applied on a consistent basis.
"PCT" means a Platform Contribution Transaction, as that term is defined and described in Treasury Regulations § 1.482-7(c), being a transaction in which a controlled participant in a cost sharing arrangement makes available to other controlled participants the use of pre-existing resources, capabilities, or rights (including intangible property) that are reasonably anticipated to contribute to developing cost shared intangibles.
"Profit Level Indicator" or "PLI" means the financial ratio used to measure the tested party's profitability under the CPM or TNMM, as applicable. For purposes of Covered Transaction 1, the PLI is HSI's Operating Margin on net third-party US resales.
"Qualified R&D Costs" means the research and development costs that qualify for cost sharing under the CSA, as defined in and determined pursuant to the terms of the CSA. For the avoidance of doubt, Qualified R&D Costs represent a subset of HSAG's total R&D expenditures.
"Rollback Period" means the three prior tax years beginning on January 1, 2022 and ending on December 31, 2024, to which the TPMs set forth in this Agreement may be applied if the Competent Authorities and both applicants so agree, as further described in Section 8.02.
"Rollback Year" means each fiscal year (beginning January 1 and ending December 31) within the Rollback Period. Rollback Year 1 refers to the calendar year ending December 31, 2022; Rollback Year 2 refers to the calendar year ending December 31, 2023; and Rollback Year 3 refers to the calendar year ending December 31, 2024.
"Tested Party" means the party whose financial results are tested under the applicable TPM to determine whether the arm's-length standard has been satisfied. For Covered Transaction 1, the Tested Party is HSI, as the least complex entity in the controlled transaction.
"TNMM" means the Transactional Net Margin Method, as described in Chapter II of the OECD Transfer Pricing Guidelines (2022 edition), under which the arm's-length result is determined by reference to the net profit margin that comparable uncontrolled enterprises earn from comparable transactions.
"TPM" means a Transfer Pricing Method, being the method selected by the Competent Authorities for determining the arm's-length result for each Covered Transaction, as set forth in Articles IV, V, and VI.
"Treaty" means the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and to Certain Other Taxes, signed at Berlin on June 29, 2006, together with its Protocol, as the same may be amended, supplemented, or modified by any subsequent agreement between the Contracting States.
Section 1.02 — Rules of Construction
The following rules of construction shall apply to this Agreement:
(a) Headings. The headings and titles of the Articles, Sections, and subsections of this Agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement.
(b) Singular and Plural. Unless the context otherwise requires, words importing the singular include the plural and vice versa, and words importing any gender include all genders.
(c) Currency. All monetary amounts expressed in this Agreement are denominated in the currency indicated (United States Dollars, "USD" or "$"; Euros, "EUR" or "€"). Where amounts are expressed in both currencies, the USD equivalent is provided for reference purposes and is based on the average EUR/USD exchange rate for the applicable period unless otherwise indicated.
(d) EUR/USD Conversion Principles. Unless otherwise specified, conversion between EUR and USD for purposes of computing compliance with the TPMs shall be performed using: (i) for annual financial data and Operating Margin computations, the average EUR/USD exchange rate for the applicable APA Year as reported by the European Central Bank; (ii) for royalty payments, the payment-date weighted average EUR/USD exchange rate for the applicable APA Year; and (iii) for cost-sharing contributions, the quarterly average EUR/USD exchange rate for each quarter in which contributions are made.
(e) References to Statutes and Regulations. All references to statutes, regulations, revenue procedures, and other legal authorities include any amendments, successor provisions, or replacements thereof, unless the context clearly indicates that a specific version is intended. Any reference to the IRC or Treasury Regulations means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, respectively.
(f) References to Agreements. All references to the MISA, IP License Agreement, CSA, and other intercompany agreements refer to such agreements as in effect on the date hereof, including any amendments made in the ordinary course of business that are consistent with the terms and assumptions of this Agreement.
(g) Including. The word "including" (and cognate expressions such as "include" and "includes") means "including without limitation."
ARTICLE II — PARTIES AND COVERED ENTITIES
Section 2.01 — US Applicant
The US applicant is Halcyon Semiconductor Inc. ("HSI"), a corporation organized and existing under the laws of the State of Delaware, Delaware File Number 7341825, with United States Employer Identification Number 84-2917630. HSI's registered agent is c/o Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, Delaware 19801. HSI's principal office is located at 8700 Parmer Lane, Building 4, Austin, Texas 78729.
HSI serves as the exclusive US distribution, marketing, and design-support entity for Halcyon semiconductor products in North America. HSI purchases semiconductor wafers and singulated die from HSAG under the MISA and resells finished and packaged semiconductor products to unrelated US customers, including original equipment manufacturers ("OEMs"), authorized distributors, and hyperscale data center operators. In addition to its distribution activities, HSI operates a design center located at 2455 Augustine Drive, Suite 300, Santa Clara, California 95054, where it provides application engineering, design-in support, and technical customer liaison services to North American customers. HSI also maintains regional sales offices in Southfield, Michigan and Beaverton, Oregon, which serve the automotive and industrial customer segments, respectively.
As of the date of the APA application, HSI employs approximately 2,850 personnel in the United States, including sales, marketing, applications engineering, design-support, logistics, and administrative staff. HSI's President and General Manager is Victor Almeida, and its Vice President, Tax is Priya Raghavan. HSI's fiscal year ends on December 31.
Section 2.02 — German Applicant
The German applicant is Halcyon Semiconductor AG ("HSAG"), an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, Steuernummer 203/118/04527, Umsatzsteuer-Identifikationsnummer DE 814 723 956. HSAG's registered office is located at Halcyon-Allee 12, 01099 Dresden, Saxony, Germany. HSAG is publicly listed on the Frankfurt Stock Exchange (XETRA), ISIN DE000HSA0017, WKN HSA001.
HSAG is a leading developer and manufacturer of advanced-node semiconductor wafers for automotive, industrial IoT, and data-center applications. HSAG designs and fabricates semiconductors using advanced process technologies, including 7nm, 5nm, and 3nm process nodes, and is actively developing next-generation 2nm and sub-2nm process technologies. HSAG operates three fabrication facilities in Germany: Fab 1 and Fab 2 are located at Industriepark Klotzsche, Zur Wetterwarte 50, 01109 Dresden, and Fab 3 is located at Technologiepark Chemnitz, Annaberger Straße 240, 09125 Chemnitz. HSAG's fabrication facilities represent substantial capital investment and embody significant proprietary process technology and manufacturing know-how.
HSAG is the group's principal entity and entrepreneurial risk-bearer. HSAG owns the vast majority of the Halcyon group's intangible property, including semiconductor process technology, design libraries, circuit layouts, patents, trade secrets, and brand intangibles. HSAG is responsible for the group's research and development activities, with total R&D expenditure in FY 2024 of approximately €1,420,000,000, of which €998,200,000 constituted Qualified R&D Costs under the CSA.
As of the date of the APA application, HSAG employs approximately 22,400 personnel globally, of whom approximately 14,600 are located in Germany. HSAG's Chief Executive Officer is Dr. Klaus-Dieter Wehrheim; its Chief Financial Officer is Margarethe Stein; its Senior Vice President, Group Tax is Dr. Erwin Fassbinder; and its Chief Technology Officer is Dr. Hendrik Möller. HSAG's fiscal year ends on December 31.
Section 2.03 — Ownership Structure
HSI is a wholly owned (100%) subsidiary of HSAG. HSAG directly holds all of the issued and outstanding shares of common stock of HSI. The HSAG-HSI parent-subsidiary relationship has been in effect since HSI's incorporation and has remained unchanged through the date of this Agreement.
The Halcyon group also includes the following affiliated entities, which are not covered by this Agreement: (a) Halcyon Semiconductor Japan K.K. ("HSJ"), a Kabushiki Kaisha organized under the laws of Japan, with its registered office in Tokyo, Japan; and (b) Halcyon Semiconductor (Shanghai) Co., Ltd. ("HSC"), a wholly foreign-owned enterprise ("WFOE") organized under the laws of the People's Republic of China, with its registered office in Shanghai, China. This Agreement does not cover any transactions between HSAG or HSI, on the one hand, and HSJ or HSC, on the other hand. Any transfer pricing issues arising from transactions with HSJ or HSC are outside the scope of this Agreement and are subject to separate analysis and, if applicable, separate advance pricing agreements.
ARTICLE III — COVERED TRANSACTIONS
Section 3.01 — Covered Transaction 1: Sale of Tangible Goods (Semiconductor Wafers and Die)
Description. Covered Transaction 1 consists of the manufacture and sale by HSAG of semiconductor wafers and singulated die to HSI under the terms of the Master Intercompany Supply Agreement ("MISA"). HSAG manufactures the semiconductor products at its fabrication facilities in Dresden (Fab 1 and Fab 2) and Chemnitz (Fab 3), using its proprietary advanced-node process technologies. The semiconductor wafers and die are shipped by HSAG to HSI's distribution and logistics hub in Austin, Texas, where HSI manages packaging, testing (through third-party subcontractors), warehousing, and distribution to unrelated US customers. HSI resells the finished and packaged semiconductor products to unrelated third-party customers in the United States, including original equipment manufacturers, authorized distributors, and hyperscale data center operators.
Reference Volume. In FY 2024, HSAG sold semiconductor wafers and die to HSI at an aggregate intercompany transfer price of €987,600,000, equivalent to approximately $1,076,000,000 at the average 2024 EUR/USD exchange rate of 1.0896.
Direction of Flow. Tangible goods flow from HSAG to HSI. Payments for tangible goods flow from HSI to HSAG.
Section 3.02 — Covered Transaction 2: Royalty Payments for Licensed intellectual Property
Description. Covered Transaction 2 consists of the payment by HSI to HSAG of a running royalty for the right to use HSAG's proprietary semiconductor process technology, design libraries, and related intangible property in HSI's US distribution, marketing, and design-support activities, pursuant to the intellectual Property License Agreement effective January 1, 2019. The licensed intangible property includes patented semiconductor manufacturing processes, proprietary design libraries and layout databases, product specifications, trade secrets, and associated technical know-how. The IP License Agreement grants HSI a non-exclusive, non-transferable license to exploit the licensed intangibles in the United States and other North American territories.
Reference Volume. In FY 2024, HSI paid royalties to HSAG in the aggregate amount of €68,400,000, equivalent to approximately $70,500,000 at the payment-date weighted average EUR/USD rate of 1.0307. The royalty is computed as a percentage of HSI's IP-Attributable Revenues.
Direction of Flow. Royalty payments flow from HSI to HSAG.
Section 3.03 — Covered Transaction 3: Cost-Sharing Contributions under the Qualified Cost Sharing Arrangement
Description. Covered Transaction 3 consists of the cost-sharing contributions made by HSI to HSAG under the Qualified Cost Sharing Arrangement ("CSA") effective July 15, 2018. The CSA governs the sharing of costs and risks associated with the development of next-generation 2nm and sub-2nm semiconductor process technologies. Under the CSA, HSAG conducts the research and development activities at its facilities in Dresden and Chemnitz, and HSI makes periodic cost-sharing contributions reflecting its anticipated benefit share from the exploitation of the resulting intangible property in North America. HSI's anticipated benefit share is based on its expected share of future revenues and profits attributable to the cost-shared intangible property in its assigned territory.
Reference Volume. In FY 2024, total Qualified R&D Costs under the CSA were €998,200,000. HSI's share of such costs was 22.5%, resulting in a cost-sharing contribution of €224,600,000, equivalent to approximately $231,300,000.
Direction of Flow. Cost-sharing contributions flow from HSI to HSAG.
PCT Buy-In. In connection with the inception of the CSA, HSI made a platform contribution transaction ("PCT") buy-in payment to HSAG in the amount of $312,500,000 on July 15, 2018. The PCT payment was determined using the income method described in Treasury Regulations § 1.482-7(g)(4), with a discount rate of 11.8% and a projection period of 15 years, as valued by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director). The PCT payment compensated HSAG for making available to the CSA certain pre-existing intangible property, including foundational process technology and design capabilities, that were reasonably anticipated to contribute to the development of the cost-shared intangibles.
Section 3.04 — Aggregate Annual Intercompany Flows
The aggregate annual intercompany flows between HSAG and HSI for FY 2024 (the most recent completed fiscal year) were as follows:
The aggregate intercompany flows of approximately €1.28 billion represent a material component of both HSI's cost of goods sold and operating expenses and HSAG's consolidated revenue, underscoring the significance of the Covered Transactions to both applicants and to both Competent Authorities.
Section 3.05 — Transactions Not Covered
This Agreement does not cover and is not intended to apply to:
(a) Any transaction between HSAG or HSI, on the one hand, and any other affiliated entity (including Halcyon Semiconductor Japan K.K. and Halcyon Semiconductor (Shanghai) Co., Ltd.), on the other hand;
(b) Any transaction between HSI and unrelated third parties, except to the extent that such transactions are relevant to the computation of HSI's PLI or IP-Attributable Revenues for purposes of testing compliance under Articles IV and V;
(c) Any intercompany services, management fees, guarantees, or other transactions between HSAG and HSI that are not described in Sections 3.01, 3.02, and 3.03 of this Agreement; and
(d) Any transactions arising after the date hereof that are materially different in nature from the Covered Transactions, unless such transactions are brought within the scope of this Agreement by mutual written agreement of the Competent Authorities.
ARTICLE IV — TRANSFER PRICING METHOD: COVERED TRANSACTION 1 (TANGIBLE GOODS)
Section 4.01 — Selected Method
The Competent Authorities have agreed that the Comparable Profits Method ("CPM"), as described in Treasury Regulations § 1.482-5, is the most reliable method for determining the arm's-length result for Covered Transaction 1. The Competent Authorities further acknowledge that the CPM, as applied in this Agreement, is consistent with the Transactional Net Margin Method ("TNMM") as described in Chapter II of the OECD Transfer Pricing Guidelines (2022 edition), and that the results produced under the CPM would be substantially the same as those produced under the TNMM for this Covered Transaction.
The selection of the CPM/TNMM as the most reliable method for Covered Transaction 1 is justified under the best method rule set forth in Treasury Regulations § 1.482-1(c) and is consistent with the principles of Article 9 of the Treaty. In selecting the CPM/TNMM, the Competent Authorities have considered the following factors: (i) the degree of comparability between the Covered Transaction and the uncontrolled transactions or companies used as benchmarks, after application of Comparability Adjustments; (ii) the quality of the data and assumptions underlying the analysis; (iii) the reliability of the results in light of the nature of the transaction; and (iv) the fact that HSI, as a limited-risk distributor, can be reliably benchmarked against uncontrolled companies performing comparable functions and assuming comparable risks.
The Tested Party for purposes of Covered Transaction 1 is HSI, as the least complex entity in the controlled transaction. HSI performs routine distribution, marketing, and design-support functions in the US market and does not own significant intangible property or assume entrepreneurial risks beyond those inherent in a limited-risk distributor role. HSAG, by contrast, is the complex, IP-rich principal entity that undertakes fabrication, research and development, and bears the preponderance of intangible-related and operational risks. Accordingly, it is more reliable to test HSI's profitability against comparable distributors than to test HSAG's profitability, given the difficulty of identifying comparables for HSAG's multifaceted operations.
Section 4.02 — Arm's-Length Range
The Profit Level Indicator ("PLI") selected for testing HSI's profitability under the CPM/TNMM is the Operating Margin, calculated as HSI's operating income divided by its net third-party US revenue from the resale of semiconductor products, expressed as a percentage.
The Economic Analysis identifies a benchmark set of seventeen (17) comparable North American semiconductor distributors, selected through a systematic screening process applied to publicly available financial databases. The benchmark set includes companies that: (a) derive a majority of their revenue from the distribution of semiconductor products to unrelated customers; (b) do not own significant intangible property or undertake substantial R&D activities; (c) operate primarily in the North American market; and (d) have sufficient financial data available for the five fiscal years 2020 through 2024. Comparability adjustments, including working capital adjustments, have been applied to improve the reliability of the comparison.
Based on the five-year weighted average Operating Margins of the seventeen comparables over fiscal years 2020 through 2024, the arm's-length range for Covered Transaction 1 is as follows:
HSI's Operating Margin for FY 2024 was 4.80%, which falls within the Interquartile Range of 2.8% to 6.1% and is above the Median of 4.4%. The full benchmark set, including the identity of the comparable companies, their financial data, and the Comparability Adjustments applied, is set forth in Appendix B (Economic Analysis and Benchmarking Results).
Section 4.03 — Application of the Method
For each APA Year (and each Rollback Year, to the extent the Rollback Period is covered by this Agreement), HSI's Operating Margin shall be computed in accordance with the methodology described in Section 4.02 and compared to the Arm's-Length Range.
(a) Result Within IQR. If HSI's Operating Margin for an APA Year (or Rollback Year) falls within the Interquartile Range of 2.8% to 6.1% (inclusive), no adjustment to the intercompany transfer price for tangible goods shall be required, and the Covered Transaction 1 pricing for that year shall be deemed to satisfy the arm's-length standard.
(b) Result Outside IQR. If HSI's Operating Margin for an APA Year (or Rollback Year) falls outside the Interquartile Range — whether above 6.1% or below 2.8% — the intercompany transfer price for tangible goods under the MISA shall be adjusted so that HSI's Operating Margin is brought to the Median of 4.4%. The adjustment shall be computed as the difference between the transfer price that would produce an Operating Margin of 4.4% and the actual transfer price charged, and shall be effected through the compensating adjustment and year-end true-up mechanism described in Section 4.04.
(c) Direction of Adjustment. If HSI's Operating Margin exceeds 6.1%, the intercompany transfer price shall be adjusted upward (increasing the price paid by HSI to HSAG), thereby reducing HSI's Operating Margin to the Median. If HSI's Operating Margin falls below 2.8%, the intercompany transfer price shall be adjusted downward (decreasing the price paid by HSI to HSAG), thereby increasing HSI's Operating Margin to the Median.
Section 4.04 — Compensating Adjustments and Year-End True-Up
HSI shall compute its preliminary Operating Margin for each APA Year within ninety (90) days after the close of such APA Year, based on unaudited financial data. If the preliminary Operating Margin falls outside the Interquartile Range, HSAG and HSI shall implement a compensating adjustment to the intercompany transfer prices for tangible goods sold under the MISA during such APA Year, in an amount sufficient to bring HSI's Operating Margin to the Median of 4.4%.
The compensating adjustment shall be effected through the issuance of intercompany debit notes or credit notes (as appropriate) by HSAG to HSI (or by HSI to HSAG), which shall be issued within ninety (90) days after the close of the applicable APA Year. The debit or credit notes shall clearly identify the nature of the adjustment, the APA Year to which the adjustment relates, and the amount of the adjustment in both EUR and USD. The compensating adjustment shall be recorded in the books and records of both HSAG and HSI as an adjustment to the transfer price for tangible goods and shall be reflected in the financial results of the APA Year to which the adjustment relates.
All currency conversions for purposes of the year-end true-up shall be performed using the average EUR/USD exchange rate for the applicable APA Year, as reported by the European Central Bank.
The Competent Authorities acknowledge that the year-end true-up mechanism is designed to ensure that the Covered Transaction 1 pricing satisfies the arm's-length standard for each APA Year and that the compensating adjustments are economically equivalent to adjustments to the transfer price at which the tangible goods were originally sold. The true-up mechanism does not alter the substance of the underlying transactions or create new transactions.
Section 4.05 — Comparability Adjustments
The Comparability Adjustments applied to the benchmark set in the Economic Analysis, including working capital adjustments and other adjustments to improve comparability, shall continue to be applied consistently throughout the APA Term. The methodology for computing Comparability Adjustments is described in detail in Appendix B (Economic Analysis and Benchmarking Results).
If, during the APA Term, changes in applicable accounting standards (whether US GAAP, IFRS, or German GAAP), data availability, or other factors necessitate modifications to the Comparability Adjustments, HSI and HSAG shall consult with the Competent Authorities before implementing any such modifications. Any modifications to the Comparability Adjustments shall be documented in the Annual Compliance Report for the affected APA Year and shall be subject to review by the Competent Authorities.
ARTICLE V — TRANSFER PRICING METHOD: COVERED TRANSACTION 2 (ROYALTIES)
Section 5.01 — Selected Method
The Competent Authorities have agreed that the Comparable Uncontrolled Transaction ("CUT") method, as described in Treasury Regulations § 1.482-4(c), is the most reliable method for determining the arm's-length royalty rate for Covered Transaction 2. The CUT method determines the arm's-length royalty by reference to the royalty rates charged in comparable uncontrolled transactions involving the license of comparable intangible property under comparable circumstances.
The selection of the CUT method has been corroborated by a residual profit split analysis, as discussed in Section 5.04 below. The Competent Authorities are satisfied that the combined application of the CUT method (as the primary method) and the residual profit split analysis (as a corroborative check) provides a reliable determination of the arm's-length royalty.
The selection of the CUT method as the most reliable method for Covered Transaction 2 is justified under the best method rule set forth in Treasury Regulations § 1.482-1(c) and is consistent with the principles of Article 9 of the Treaty. The CUT method is preferred for this Covered Transaction because: (i) sufficiently comparable uncontrolled license agreements have been identified; (ii) the terms and conditions of the comparable agreements are sufficiently similar to those of the IP License Agreement to permit reliable comparison after appropriate adjustments; and (iii) the CUT method provides a more direct measure of the arm's-length royalty than indirect methods such as the CPM or TNMM.
Section 5.02 — Arm's-Length Range and Rate
The Economic Analysis identifies a benchmark set of eight (8) comparable uncontrolled license agreements for semiconductor-related intangible property. The comparable agreements were sourced from the Clearpoint Royalty Database and publicly available SEC filings, and were selected based on the following criteria: (a) the licensed intangibles are comparable in nature to HSAG's licensed semiconductor process technology and design libraries; (b) the license terms (including exclusivity, territory, and duration) are comparable to the IP License Agreement; (c) the licensees perform functions comparable to those performed by HSI; and (d) sufficient data is available to determine the effective royalty rate and relevant contractual terms.
Based on the benchmark set, the arm's-length range for the royalty rate is as follows:
The Competent Authorities have agreed on a royalty rate of 6.0%, applied as a running royalty to HSI's IP-Attributable Revenues. The agreed rate of 6.0% falls within the Interquartile Range and is above the Median of 5.6%, reflecting the high value and technological sophistication of HSAG's licensed intangible property, the breadth of the license grant, and the competitive advantages conferred upon HSI through access to HSAG's advanced-node process technology and design libraries.
Section 5.03 — Computation of Royalty
For each APA Year (and each Rollback Year, to the extent applicable), the royalty payable by HSI to HSAG shall be computed as follows:
Royalty = IP-Attributable Revenues × 6.0%
HSI shall compute IP-Attributable Revenues for each APA Year in accordance with the revenue attribution methodology set forth in the IP License Agreement. IP-Attributable Revenues represent the portion of HSI's net third-party US revenue that is attributable to the use and exploitation of HSAG's licensed intangible property, as distinguished from revenue attributable to HSI's own distribution, marketing, and design-support activities. The methodology for computing IP-Attributable Revenues is described in the IP License Agreement and summarized in Appendix B (Economic Analysis and Benchmarking Results).
Royalty payments shall be denominated in EUR. The conversion from USD (in which HSI's revenues are denominated) to EUR shall be performed using the payment-date weighted average EUR/USD exchange rate for the applicable APA Year. For reference, the FY 2024 payment-date weighted average EUR/USD exchange rate was 1.0307.
Royalty payments shall be made on a quarterly basis, with a final true-up payment within sixty (60) days after the close of each APA Year, based on the actual IP-Attributable Revenues for such year. The quarterly payments shall be based on estimated IP-Attributable Revenues for the applicable quarter, and the final true-up shall reconcile the total royalty paid to the full-year IP-Attributable Revenues.
Section 5.04 — Corroboration via Residual Profit Split
The Competent Authorities acknowledge that the 6.0% royalty rate agreed upon in Section 5.02 has been corroborated by a residual profit split analysis, the full details of which are set forth in the Economic Analysis Appendix to the APA applications filed by HSI and HSAG. The residual profit split analysis allocates the combined operating profit of HSAG and HSI from the Covered Transactions by first compensating each party for its routine contributions (based on benchmark returns for routine functions) and then allocating the residual profit between the parties based on their respective contributions of valuable, unique intangible property and other non-routine factors. The corroboration analysis confirms that the 6.0% royalty rate produces an allocation of income consistent with the contributions of each party.
If, in any APA Year, the residual profit split corroboration analysis produces results that are materially inconsistent with the 6.0% royalty rate — defined for this purpose as a deviation of more than 1.5 percentage points from the rate that would be implied by the residual profit split allocation — HSI and HSAG shall promptly notify the Competent Authorities. The Competent Authorities shall consult to determine whether a revision to the agreed royalty rate is warranted, taking into account the reasons for the deviation and whether it reflects a change in the underlying economic circumstances or a breakdown of a Critical Assumption.
ARTICLE VI — TRANSFER PRICING METHOD: COVERED TRANSACTION 3 (COST SHARING)
Section 6.01 — Selected Method
The Competent Authorities have agreed that the cost-sharing contributions made by HSI under the CSA shall be determined using the income method described in Treasury Regulations § 1.482-7(g)(4), applied in a manner consistent with Chapter VIII of the OECD Transfer Pricing Guidelines (2022 edition). The CSA between HSAG and HSI is a Qualified Cost Sharing Arrangement as defined in Treasury Regulations § 1.482-7, and the cost-sharing provisions of this Agreement are designed to ensure that the allocation of costs and anticipated benefits under the CSA satisfies the arm's-length standard.
Under the income method, each participant's anticipated benefit share is determined by reference to its reasonably anticipated future benefits from the exploitation of the cost-shared intangibles in its respective territory, measured by the present value of projected income streams attributable to the cost-shared intangibles. The anticipated benefit shares are then used to allocate the Qualified R&D Costs among the CSA participants.
Section 6.02 — Cost-Sharing Percentages
The anticipated benefit shares of the CSA participants, as determined by the income method and agreed upon by the Competent Authorities, are as follows:
For each APA Year, HSI's share of Qualified R&D Costs under the CSA shall be computed as follows:
HSI's Cost-Sharing Contribution = Total Qualified R&D Costs × 22.5%
For reference, in FY 2024, total Qualified R&D Costs were €998,200,000, and HSI's share was €998,200,000 × 22.5% = €224,595,000 (rounded to €224,600,000 in this Agreement).
The anticipated benefit shares reflect the parties' reasonably expected shares of future economic benefits from the exploitation of the cost-shared intangibles, based on projections of future revenues, profit margins, and market conditions in their respective territories. The basis for the benefit share determination is set forth in detail in the Economic Analysis (Appendix B).
Section 6.03 — Triennial Benefit Share Review
The anticipated benefit shares set forth in Section 6.02 shall be reviewed periodically to determine whether they continue to reflect the parties' reasonably anticipated benefits from the exploitation of the cost-shared intangibles. The review shall be conducted every three years, as follows:
(a) First Review. The first review shall cover APA Years 2025, 2026, and 2027. HSI and HSAG shall complete the review no later than June 30, 2028, and shall report the results to the Competent Authorities in the Annual Compliance Report for APA Year 2027.
(b) Second Review. The second review shall cover APA Years 2028 and 2029, together with the first year of any renewal term (if applicable). HSI and HSAG shall complete the review no later than June 30, 2030 (or such later date as may be agreed in connection with any renewal), and shall report the results to the Competent Authorities accordingly.
If a triennial review yields a revised anticipated benefit share for HSI that differs by more than two (2) percentage points from the then-applicable percentage (i.e., by more than 2 percentage points above or below 22.5%, or the then-current share if previously adjusted), the parties shall adjust the benefit shares prospectively, effective as of the first APA Year following the review. Any such adjustment shall be reported to the Competent Authorities in the next Annual Compliance Report, together with supporting documentation. Any adjustment to the anticipated benefit shares pursuant to this Section 6.03 does not constitute a periodic adjustment under Treasury Regulations § 1.482-7(i) unless the Competent Authorities expressly specify otherwise.
If a triennial review yields a revised anticipated benefit share for HSI that differs by two (2) percentage points or less from the then-applicable percentage, no adjustment shall be required, and the existing benefit shares shall continue to apply.
Section 6.04 — Platform Contribution Transaction (PCT)
The Competent Authorities acknowledge and accept that the PCT buy-in payment of $312,500,000 made by HSI to HSAG on July 15, 2018, in connection with the inception of the CSA, was determined using the income method described in Treasury Regulations § 1.482-7(g)(4). The PCT valuation was performed by Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director) using the following key parameters: (i) a discount rate of 11.8%, reflecting the risk-adjusted cost of capital appropriate for early-stage semiconductor process R&D; and (ii) a projection period of 15 years, reflecting the estimated useful economic life of the pre-existing intangible property contributed to the CSA. The PCT valuation summary is set forth in Appendix E.
The Competent Authorities accept the PCT valuation of $312,500,000 for purposes of this Agreement. No further PCT payment shall be required during the APA Term unless new pre-existing intangible property is contributed to the CSA by either participant during such period. In the event that new pre-existing intangibles are contributed to the CSA during the APA Term, the provisions of Treasury Regulations § 1.482-7(c) shall apply to determine the arm's-length compensation for such contribution, and the parties shall notify the Competent Authorities of any such contribution and the resulting PCT payment within ninety (90) days of the contribution.
Section 6.05 — Qualified R&D Costs
For purposes of this Agreement, "Qualified R&D Costs" shall have the meaning assigned to that term in the CSA. Qualified R&D Costs represent the subset of HSAG's total R&D expenditures that relate directly to the development of next-generation 2nm and sub-2nm semiconductor process technologies and that qualify for cost sharing under the terms of the CSA. HSAG's total R&D expenditure in FY 2024 was €1,420,000,000, of which €998,200,000 (approximately 70.3%) constituted Qualified R&D Costs subject to cost sharing under the CSA.
The remaining R&D expenditures of €421,800,000 relate to maintenance and incremental improvement of existing process technologies (7nm, 5nm, 3nm), product-specific design activities, and other research activities that fall outside the scope of the CSA. Such expenditures are borne solely by HSAG and are not subject to cost sharing.
The determination of whether a particular R&D expenditure constitutes a Qualified R&D Cost shall be made in accordance with the definitions and criteria set forth in the CSA. HSI and HSAG shall maintain contemporaneous documentation sufficient to identify and substantiate the Qualified R&D Costs for each APA Year, and shall include a summary of such costs in each Annual Compliance Report.
ARTICLE VII — CRITICAL ASSUMPTIONS
Section 7.01 — General
This Agreement is premised on the Critical Assumptions set forth in this Article VII. The Competent Authorities have relied upon these Critical Assumptions in agreeing to the TPMs, arm's-length ranges, royalty rates, and cost-sharing percentages set forth herein. The continued validity of this Agreement depends upon the continued validity of these Critical Assumptions. If any Critical Assumption ceases to be valid, or if circumstances arise that cause any Critical Assumption to be materially inaccurate, the provisions of Article XI (Revision, Cancellation, and Revocation) shall apply.
Section 7.02 — Enumeration of Critical Assumptions
The Critical Assumptions upon which this Agreement is premised are as follows:
1. Business Operations. HSI continues to operate as the exclusive US distribution, marketing, and design-support entity for HSAG products in North America throughout the APA Term. HSI does not undertake manufacturing, fabrication, or assembly activities, and does not assume entrepreneurial risks (including inventory risk, credit risk, or market risk) that are materially different from those described in the functional analyses submitted with the APA applications and summarized in Appendix A (Functional Analysis Summary). HSI's activities remain limited to the importation, warehousing, distribution, marketing, design-in support, and technical liaison functions described therein.
2. Ownership Structure. HSAG maintains direct or indirect ownership of 100% of the issued and outstanding equity interests in HSI throughout the APA Term. There is no change in the ownership structure of HSI, whether through sale, transfer, merger, spin-off, or otherwise, that would alter the controlled-party relationship between HSAG and HSI.
3. Intercompany Agreements. The MISA, IP License Agreement, and CSA remain in effect throughout the APA Term in substantially the form described in this Agreement and in the APA applications. Any amendments to such agreements during the APA Term are consistent with the TPMs, arm's-length ranges, and Critical Assumptions set forth herein and do not materially alter the economic substance of the Covered Transactions.
4. Functional Profile. HSI's functions, assets, and risks remain substantially consistent with the characterization of HSI as a limited-risk distributor, as described in the functional analyses submitted with the APA applications and summarized in Appendix A. HSAG remains the complex, IP-rich principal entity, performing fabrication, research and development, and bearing the entrepreneurial risks associated with semiconductor manufacturing and intangible property development. There is no material change in the allocation of functions, assets, or risks between HSAG and HSI during the APA Term.
5. Accounting Methods. Both HSAG and HSI maintain their existing accounting methods throughout the APA Term, including fiscal year-ends of December 31, and do not make changes to their accounting methods, accounting principles (US GAAP for HSI; IFRS for HSAG's consolidated financial statements), or financial reporting practices that would materially affect the computation of the Profit Level Indicators, Operating Margins, IP-Attributable Revenues, Qualified R&D Costs, or other financial measures used to test compliance with this Agreement.
6. Legal and Regulatory Environment. There are no material changes in US tax law (including the IRC, Treasury Regulations, and IRS guidance), German tax law (including the AStG, AO, and GAufzV), the OECD Transfer Pricing Guidelines, or the Treaty that would render the TPMs selected in this Agreement inapplicable, that would make the arm's-length ranges inappropriate, or that would otherwise fundamentally alter the basis upon which the Competent Authorities have reached this Agreement. For the avoidance of doubt, routine updates to the OECD Transfer Pricing Guidelines or minor legislative amendments that do not affect the substance of the arm's-length standard or the selected TPMs shall not constitute a breach of this Critical Assumption.
7. Industry Conditions. The semiconductor industry does not experience a structural disruption — such as government-mandated production restrictions, export controls targeting the specific products or technologies at issue, trade embargoes, or supply chain dislocation exceeding eighteen (18) consecutive months — that would fundamentally alter the comparability of the benchmark sets used in the Economic Analysis, render the benchmark sets unreliable, or make the arm's-length ranges and royalty rates inapplicable.
8. CSA Scope. The CSA continues to cover the development of next-generation 2nm and sub-2nm semiconductor process technologies, and there is no material change in the scope of the intangible development activities governed by the CSA or in the identity of the cost-sharing participants. The CSA is not expanded to cover materially different categories of intangible property (such as unrelated product designs or non-semiconductor technologies) during the APA Term.
9. No New Related-Party Participants. No additional related entities — including, without limitation, Halcyon Semiconductor Japan K.K. or Halcyon Semiconductor (Shanghai) Co., Ltd. — become parties to the CSA or to any of the Covered Transactions during the APA Term without prior written notification to both Competent Authorities and their consent to such addition.
10. Transfer of Intangibles. HSAG does not transfer ownership of material intangible property that is the subject of the IP License Agreement to any entity other than HSI during the APA Term, whether by sale, license, contribution, or otherwise, in a manner that would materially affect the arm's-length royalty rate or the allocation of income between the Contracting States.
Section 7.03 — Notification Obligations
HSI and HSAG shall each notify the Competent Authorities in writing within thirty (30) days of becoming aware that any Critical Assumption has ceased to be valid, has been breached, or is reasonably likely to cease to be valid in the foreseeable future. The notification shall include: (a) an identification of the Critical Assumption at issue; (b) a description of the relevant change or event; (c) the date on which the change occurred or is expected to occur; and (d) the anticipated impact of the change on the Covered Transactions, the selected TPMs, and the arm's-length results.
Notification shall be provided simultaneously to both the IRS (through the APMA program) and the BZSt, with copies to the applicants' respective legal counsel. Failure to provide timely notification of a breach of a Critical Assumption may constitute grounds for cancellation or revocation of this Agreement under Article XI.
ARTICLE VIII — APA TERM AND ROLLBACK
Section 8.01 — Prospective APA Term
This Agreement covers five (5) consecutive prospective tax years, constituting the APA Term, as follows:
For each APA Year, HSI and HSAG shall apply the TPMs set forth in Articles IV, V, and VI to the Covered Transactions and shall report their compliance in the Annual Compliance Reports required under Article IX.
Section 8.02 — Rollback Provisions
The applicants request, and the Competent Authorities agree to consider, the application of the TPMs set forth in this Agreement to the three (3) prior tax years constituting the Rollback Period, as follows:
The application of this Agreement to the Rollback Period is subject to the following conditions:
(a) Competent Authority Consent. Both Competent Authorities must consent to the rollback in writing. Consent by one Competent Authority does not obligate the other to consent.